Honghua prices IPO in the middle of the range

The price pitches the oil rig manufacturer at a discount to its key comparables and allows it to raise $409 million.
Honghua Group, which manufactures oil and gas drill rigs for the onshore market, has become the first company of size to complete a Hong Kong initial public offering this year after fixing its offering price at the mid-point of the range. The final price of HK$3.83 resulted in a base deal size of HK$3.2 billion ($409 million).

Investors who were looking at the deal say joint bookrunners Credit Suisse and Morgan Stanley had indicated during the bookbuild that there was price sensitivity in the lower half of the order book, although sources say the deal was well covered across the range. The decision to keep the price in the middle suggests that some key accounts may have been unwilling to pay the full price though.

Given the continued volatility in the secondary market and the fact that the four Hong Kong IPOs before it this year were all withdrawn ahead of pricing, the bookrunners would also have tried to ensure the shares were placed primarily with long-term investors who wonÆt turn around and dump them at the first sign of a potential sell-off. The fact that there is a full week between the pricing and the actual trading debut increases the pricing risk as it is hard to project what will happen to the rest of the market during this time. The more volatile the market is, the higher this risk becomes.

That in mind, one observer says it should be ôquite encouragingö for the market that Honghua managed to price above the bottom of the range. The shares were offered in a range between HK$3.16 and HK$4.50.

However, with Wall Street off 2.5% on Friday amid renewed worries about a global recession, it remains to be seen if this was the right decision. In any case it seems likely that Asian markets are in for another tough session today and that the volatility will stay high.

According to the sources, the 90% institutional tranche was more than 11 times covered with well over 100 investors submitting orders, while the retail tranche attracted about 28 times the number of shares on offer. The outcome of the retail offering was somewhat surprising given that the larger and more high-profile IPO from China Railway Construction Corporation began accepting retail orders on Friday and many retail investors had been expected to save their money for that. The level of demand was sufficient to trigger a partial clawback that boosted the size of the retail tranche to 30% of the total.

Honghua sold 25% of its share capital in the form of 833.4 million new shares. The final price values it at about 14.6 times its projected 2008 earnings, which represents a significant discount to London-listed Russian competitor Integra Group at about 21 times and a somewhat smaller discount to the worldÆs largest oil rig manufacturer National Oilwell Varco (NOV), which is listed in the US and trades at 13.4 times.

The second largest land rig manufacturer in the world, Honghua was said to have captured the attention of investors because of its good track record and high-profile customers, including US-listed Nabors Industries and various subsidiaries of domestic on-shore giants China National Petroleum Corporation and Sinopec.

The company is not a direct play on oil prices, apart from the fact that a higher price may make its customers more interested in expanding drilling operations and investing in new equipment. However, retail investors in particular were believed to have been influenced by the fact that the price of the April crude oil futures quoted on Nymex reached an all-time high of $103.05 last week before closing at $101.80 a barrel on Friday.

It may also have helped that Honghua already had a group of international financial investors as shareholders, including Carlyle, which will hold about 5% after the IPO.

Having delivered 89 rigs last year, Honghua plans to increase its land rig manufacturing capacity to 150 rigs this year and will spend about 12% of the net IPO proceeds to achieve this. As an added growth kicker for the future, the company is also planning to move into the manufacturing of offshore rigs, known as jack-up rigs, which are more complex and expensive and therefore carry higher margins. Honghua will set aside about 60% of the net proceeds, or about $300 million, to construct a manufacturing base for these types of rigs on the eastern coast of China. It has yet to acquire the necessary land, however, and the construction isnÆt expected to be completed until 2009 or 2010.

Honghua is due to start trading on March 7.

The only company to list through an IPO in Hong Kong so far this year is New Media Group, a Hong Kong-based publisher of Chinese-language magazines, including flagship lifestyle titles Weekend Weekly, New Monday, Oriental Sunday and Fashion & Beauty, and Economic Digest, which focuses on investment and finance. The company raised only HK$102 million ($13 million), but attracted some attention in the local media when the share price more than doubled on its February 12 debut to HK$1.48 from an IPO price of HK$0.68. It has since fallen back somewhat but still trades 40% above the listing price.Emperor Securities was the sole bookrunner.

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